BOCA RATON, Fla. (Dow Jones)--The U.S. Commodity Futures Trading Commission is drafting a proposal around co-location services that allow traders to place their computers in the same building as the trading platform, Chairman Gary Gensler announced Thursday.
The proposed rule may also potentially address issues surrounding high-frequency trading in which trading firms execute lightening-speed trades to turn a profit from often tiny spreads, Gensler said. Since the proposal is still being drafted, however, the chairman said he isn't yet sure what kinds of provisions on high-frequency trading it may entail.
"The thing that we're looking at is to make sure...it's equal and open access to whatever facilities there might be," Gensler told reporters during a Futures Industry Association press conference.
High-frequency trading and co-location practices, which are often used in the securities and futures world, have both come under scrutiny by the CFTC and Securities and Exchange Commission recently as part of a broader market structure review as regulators seek to ensure some market players aren't unfairly disadvantaged.
Co-location services are meant to help reduce execution times. Traders who can afford it will pay a fee to an exchange to allow them to place their electronic trading terminals in the same building that houses the exchange's servers.
Critics say the practice, along with high-frequency trading, may give some traders an unfair advantage by getting them important information faster than other market participants. Exchanges that allow co-location, however, have countered that the practice is fair and open because anyone can pay a fee to be able to move their trading systems to the exchange building.
The SEC has been deeply involved for months now in reviewing a wide range of equity market structure issues, including high-frequency trading, co-location, dark pools, flash orders and so-called "naked access" in which brokers give their customers direct access to a trading platform.
Last fall, the SEC unveiled a number of proposals including a ban on flash orders, which give some traders a sneak peak at market activity, and tighter restrictions for nonpublic electronic trading entities such as dark pools, which match big stock orders privately.
This year, the SEC also floated a concept release that seeks to explore issues beyond just flash trading to include co-location and high-frequency trading.
Some of those issues being explored by the SEC, such as dark pools, aren't relevant to futures markets.
But high-frequency trading and co-location are used in the futures world, and last summer Gensler announced the CFTC was sending letters to exchanges seeking greater information about both topics. The responses from those letters are helping the CFTC to craft its proposal.
"If you have a computer in Florida and it's dealing with an exchange in Chicago or London, it takes a little longer to travel than if you put your computer in Chicago or London," Gensler said, noting that this has led to the practice of co-location.
Recognizing co-location is now a service tapped by traders, Gensler said, the CFTC is exploring how it can be regulated "to ensure open and competitive markets."
CME Group (CME) Chief Executive Craig Donohue said Thursday that third parties have provided co-location services at the Chicago Mercantile Exchange, but CME is in the early stages of beginning to offer the access directly.
CME is moving to offer the service directly because traders believe it "creates a level playing field of access," he said.
In his talks with the CFTC, Donohue said CME has outlined a series of principles the exchange is using as it shifts to provide co-location services and the CFTC "is embracing" them.
The principles, he said, are "non-discriminatory access to the co-location facilities, treating every customer the same in terms of their ability to access the facility, and fully transparent pricing for all customers for those kinds of services.
"I think that will be very consistent...with what the CFTC will likely advance as key tenets for other exchanges," he added.
-By Sarah N. Lynch, Dow Jones Newswires; 202-862-6634; sarah.lynch@dowjones.com.